Guest Blog: The United States and the European Union trading blows

This guest blog by SPICe Academic Fellow Filippo Fontanelli examines the wave of tariff increases on EU imports ordered by the United States Government in October 2019. As with all guest blogs, what follows are the views of the author, not those of SPICe or indeed the Scottish Parliament.

Introduction

On 18 October 2019, the United States imposed increased tariffs on $7.5 billion-worth of goods coming from the European Union (EU). The United States Trade Representative on behalf of the United States Government has imposed tariffs on imports several times before, but this case is unique because the recent increases were authorised by the World Trade Organisation (WTO). This blogpost explains the nature and effects of tariffs in general, the process that led to the adoption of these punitive tariffs, and their effects on a range of goods from the UK.

What are tariffs?

A tariff, or custom duty, is a charge that a state collects on imported goods, when they clear customs. When subject to tariffs, imported goods find it harder to compete with goods produced locally. Imports’ prices, unlike those of the local competitors’ products, must reflect the extra cost entailed by the tariff. Tariffs are, therefore, an obstacle to international trade, because they reduce the convenience of exporting and selling goods abroad.

Who is affected by a rise in tariffs?

A raise in tariffs can affectmanufacturers willing to export their products. Likewise, traders and distributors of foreign goods in the importing country also suffer from increased tariffs. Local businesses importing foreign components for processing or assembling (for example, car manufacturers importing steel or tyres) must also cope with the increased costs of production. Ultimately, tariffs increase the price of imports paid by consumers in the importing market. The government imposing tariffs may benefit from the collection of revenues in the short-term, and the local producers benefit from the damage that tariffs cause to foreign competitors.

Can a country increase tariffs on imported goods?

The law of the WTO prohibits certain trade obstacles and limits others. Tariffs are not prohibited, but WTO rules require that member countries apply the same tariff to goods from all countries where there isn’t a preferential trade agreement in place (the most favoured nation principle). For instance, in normal circumstances the EU could not impose a tariff higher than 9.6% on fizzy drinks such as Coca Cola .

The punitive US tariffs were authorised by the WTO

In the recent past, the US administration has raised tariffs on imports from, for example, China, the EU, Mexico and Canada. In most instances, the imposition of tariffs was decided unilaterally. That is, the US apparently chose to disregard, or trusted to be exempted from, the prohibition to exceed the WTO-sanctioned rate. In contrast to this approach, the imposition of tariffs on EU goods ordered in October 2019 was authorised by the WTO.

The authorisation followed the outcome of a dispute between the EU and the US regarding the aid that the EU granted to its largest aircraft producer (Airbus), mostly in the form of highly subsidised loans. The US convinced the WTO that this practice constituted an illegal subsidy, and therefore damaged the US aircraft industry, because subsidised aircraft from the EU undermined the sales of US ones on the global market. Since the WTO found that the EU had not removed the illegal subsidies, and has no power to compel the EU to do so, it offered to the US the possibility to retaliate against the EU.

Firstly, aircraft from France, Germany, Spain, or the United Kingdom (the EU member states participating in the Airbus consortium) were hit by an additional 10% tariff. Given the complexity of aircraft purchasing contracts, whereby planes are bought years in advance, this tariff increase might damage US airlines which have bought Airbus planes but are still waiting for their delivery (typically, the purchaser pays custom duties, including unexpected ones).

The list also includes Italian and French wines and liqueurs, Greek oil, yogurt and olives, and Dutch cheese and pork.

Interestingly, while completed Airbus planes are hit by the new tariffs, components manufactured by Airbus (wings, fuselages) are spared from the tariff increase. The lenient treatment of components benefits the US assembling industry, in particular the operation of the assembling factory in Mobile, Alabama, which imports EU-made components and assembles them to provide Airbus aircraft to US-based airlines.

The risk of symmetric EU tariffs on US goods

In parallel with the dispute regarding the EU subsidies to Airbus, the WTO heard the EU’s complaint that the US had illegally helped its local manufacturer, Boeing. These two parallel but similar cases could result in comparable outcomes, as the WTO may authorise the EU to adopt punitive tariffs against US goods. The WTO has already found the US in breach of WTO rules for granting illegal subsidies to Boeing; now a WTO arbitrator is calculating the amount of permissible retaliation available to the EU. A decision is expected in early 2020.

Understandably, the EU and the US have opened negotiations to prevent the escalation of a trade war that, notwithstanding the WTO authorisation, would hurt both economies.